Who benefits from 0% interest rates?

Who benefits from 0% interest rates?

The inevitable default of Greece inches closer by the day, as does the eventual death of the US dollar, as world reserve currency.   For people not following the ongoing Greek bankruptcy saga, if you have briefly read the reports of a bailout for Greece you would be under the impression the Greek taxpayers are the ones being bailed out.  It couldn’t be further from the truth.  The truth is, Greek taxpayers WANT to default on the debt, they know repaying the debt incurred on their behalf will be a lot more painful than simply refusing to pay the debt.  Debt foisted on the population by politicians, much the same as what has happened in America and Canada.

“This is not assistance for Greece, it’s not how anyone there sees it. They understand perfectly well what the bail-out means, which is that the money will go to European bankers and bond holders, but the repayment will come from Greek taxpayers. So far from being helped, Greece is being sacrificed to save the euro.” Daniel Hannan, British MP

So who doesn’t want Greek default?  Well, any number of financial institutions around the world, who have bought Greek debt for 50 cents on the dollar, expecting to actually collect that dollar one day!  Now they understand why a dollar of Greek debt was only worth $.50, but at the time it seems everyone thought (for some reason, most likely greed) that they were getting a great deal. 

Fair value is probably closer to 10 cents on the dollar.   Then there are people and institutions that have specifically placed bets that Greece will NOT default, by selling Credit Default Swaps on Greek debt.  Those people have basically said, “If Greece pays off its onerous debt, I will win, because I sold insurance that was never claimed”, while other speculators have taken the position that Greece will default, and therefore, when Greece defaults they will collect a windfall (from people who sold CDS on the assumption Greece will never default).

Although buying Greek debt seems like a terrible idea to a normal person, to a person who only looks at the bond market (or only the CDS market) the low price of Greek debt somehow convinced people that they were getting a good deal.  This should serve as a reminder to people, that investing in debt, AKA lending money to people you don’t know, is only a good idea if you are sure you will be paid back in full.  For those holding US debt, thinking this could never happen to you, well, you might want to reconsider.

The other day I was discussing money with someone, and I mentioned that as long as interest rates are at 0% the fundamentals remain the same: expect rising asset, food, and commodity prices, a continually devaluing currency, high unemployment, and basically,speculation will continue to be rewarded over savings and investment.

I said that gold as an investment doesn’t make sense.  It just sits there.  It is not income-producing.  It is not a growing business, it is a shiny metal.  But it IS a store of value.  Its value relative to a hypothetical basket of goods will remain constant.  You can still buy a goat in Central Asia for one dinar, 1/8 of an ounce of gold, the same price (I have heard) as 200 years ago.  The tough part for people to grasp is why the dollar price of gold is steadily increasing.  Doesn’t that make it a bubble?  No, it doesn’t make it a bubble, it means the currency in which gold is priced is being devalued.

If you have to fund a worldwide empire and the annual budget deficit approaches $1 trillion, and you then fund that deficit by printing money, well, (all other borrowing in the economy remaining unchanged) each year the total amount of currency outstanding will increase by $1 trillion.   A child grasps as much when playing a few rounds of Monopoly. 

Ever play with a banker who lends money to all the players at 0%?  Me neither, but the inevitable outcome is obvious.  As the game goes on, the same amount of money will buy less goods, or in this case, less gold.  The game of Monopoly ends when the other players are not willing to sell you their properties for any amount of Monopoly money.  And that is where the crucial ‘real world’ difference lies.  Real properties, real assets, and yet, we use intrinsically worthless money!

Before you get excited, no, the Capital Research Institute did not just give investment advice, and no, we did not give the all clear to invest in real estate.  From 1990-2007, individual debt levels increased dramatically, with credit cards, 2nd mortgages, student loans, and house flippers all doing their part in setting ‘the more leveraged the better’ trend. 

To understand what assets will see their price rise the most, you have to understand that while national debts are growing, on the individual level people are deleveraging.  That means paying off their mortgage, selling the house and renting, or ‘downsizing’ their mortgage by selling their current house and buying a smaller house.  The next generation, with their severely dampened earnings outlook and weak purchasing power vs their parents at the same age, are still unable to afford real estate even at current US prices, so don’t expect them to put a bottom on the market, let alone raise it to new highs.

But again, the government is ‘making up the slack’ by borrowing record amounts, so don’t worry about the cost of essential goods like education, health care, food and energy decreasing.  You see, individuals use leverage primarily to purchase a home, and a small percentage also use leverage for speculating (they will tell you they are investing, though)!  But the government, well, it is borrowing money to fund its day to day expenses (the path to bankruptcy as we have explained many times).

Its day to day expenses include oil for the military industrial complex (so the price of oil will remain high or go higher), food (through the issuance of food stamps), health care, and education (the government is in the student loan business, meaning, they borrow money, which they then lend to students, who would otherwise be unable to afford skyrocketing tuition costs, so in effect the government is putting a floor on tuition prices). 

Gold is going up because of increased demand by individuals around the world, Latin America, India, China, Southeast Asia, and not quite as quickly as those other regions, North America and Europe.   But the supply of US dollars is also increasing, and it is losing world reserve currency status.  That means all those people around the world who held US dollars as savings or reserves are going to want to finally spend that money, and many will convert into their own national currency, but just as many will want to buy tangible goods.

Imagine you are the central bank of… say, Brazil.  You sell your sizable ($300 billion is sizable, right?) holdings, but can you buy Brazilian Reals?  No you can’t.  The Central Bank’s reserves are quite literally the only thing backing the nation’s currency, so to back your fiat currency (Reals)… with your own fiat currency (Reals)… does not make any sense.  So more likely the Central Bank would buy a basket of goods (commodities) or, as they have done historically, they would buy gold. 

Now imagine about 20 or 30 countries central banks making the same decision over a month or two.  And imagine what that would do to the USD price of gold.  Even if central banks hold off on pulling the trigger, individual investors around the world are coming to the same conclusion, so the process is underway.  If the Central Banks refuse to act then eventually they will become obsolete, their fiat holdings worthless.

Now, if we see that we are on this road to currency destruction, then why is nothing done about it?  The solution is to raise interest rates, not to 1 or 2%, but to atleast 6%, the CRI’s rough estimate for inflation over the last 3 years.  Although the rationale can not be fully covered right here, right now, it is a human one.   The richest, most powerful people on the planet are also among the most highly leveraged.  Raising interest rates would significantly weaken the dollar value of their assets, as well as increase the ‘operating costs’ (interest on their debt) of their speculative activity.  

To take it a step further, our analysis indicates that the crucial consideration may in fact be not the wealth of those at the very top of the pyramid, but the wealth of those immediately beneath them, the bureaucracy of the oligarchy, as it were.  The hands and feet of the ruling class, the ones who administer, supervise, and direct day-to-day operations at the world’s largest financial firms, energy companies, media firms, think tanks, military industrial complex, intelligence agencies and so on. 

Their overlords promised them vast riches, and basically guaranteed them investment success by lending them money and telling them how to spend it (in a more honest time this was referred to as insider trading and was even considered a crime).  The overlords promised more than they could deliver  (that is, after all, what they are good at, and what keeps them in power) and now find themselves between a rock and a hard place.

The decision to sacrifice the US dollar was made, rather than financially ruining the ruling class’ bureaucracy.  Sorry America, and sorry savers!

The issue of money is a function of the government and that the banks should go out of the governing business” William Jennings Bryan, Democratic Convention, 1896

This is not assistance for Greece, it’s not how anyone there sees it. They understand perfectly well what the bail-out means, which is that the money will go to European bankers and bond holders, but the repayment will come from Greek taxpayers. So far from being helped, Greece is being sacrificed to save the euro.

first published 21/06/2011